The Canadian car parts firm Magna International has emerged as favourite in a contest to buy General Motors' European operations through a bid which protects German factories but threatens deep job cuts at two Vauxhall plants in Britain.

Germany's government, which intends to provide billions of euros in aid to the winning bidder, tonight said it prefers Magna's offer for the division over rival bids from Italy's Fiat and a private equity firm, RHJ International.

Magna has pledged to keep open all four of GM's Opel car plants in Germany. The Canadian firm envisages 10,000 job cuts, of which only 2,500 will be in Germany.

Reuters reported that during a briefing in Berlin, Magna's co-chief executive, Siegfried Wolf, said cuts would centre on GM's factory in Antwerp, Belgium, and at Vauxhall plants employing 5,000 people in Luton and Ellesmere Port, Merseyside.

"Under our concept the German sites are seen as assets and we want to keep as many jobs as possible," said Wolf. "There is a lot of know-how within the German Opel plants."

Heavy job losses in Britain would be fiercely opposed by unions and would be a blow to the business secretary, Peter Mandelson, who has made representations to Germany's government over fair treatment for GM's operations in the UK.

Tony Woodley, joint general secretary of the Unite union, warned this month that European governments were "not working together" over the GM situation.

In theory, the successful bidder will be chosen by Detroit-based GM, which is selling its European arm ahead of a likely filing for bankruptcy protection by 1 June.

But GM has admitted the European business needs €3.3bn (£2.9bn) of investment. Angela Merkel's government, conscious of job losses ahead of an election in September, has already loaned the company €1.5bn in bridge financing and is considered to be in the driving seat. A winner is likely to be named within a week.

Germany's economy minister, Karl-Theodor zu Guttenberg, said: "It would be premature to write anyone off. But it is true that we have heard many concrete things from Magna."